• Time to read 1 minute
Importance of Financial reporting for software businesses

Financial statements record everything that happened during a certain time period and enables owners to analyse the financial health of their organisation as well as the internal and external processes of the company. Let us look at how financial statements can be key to a company’s growth.

1. Budgeting and Forecasting

Understanding the past performance of a company helps owners understand what worked for them and what did not. Decisions on immediate and future investments can also be wisely made. The budgeting process allows owners to accurately forecast figures.

2. Shareholders Statement

The financial statement that describes the growth or the dip in the company helps stake-holders make important decisions with more confidence.

3. Investment Decisions

When it comes to deciding whether to invest or not, having an analysis of the company’s past performance is critical. Detailed working statements of the company are usually requested and audited. Be it the business owner or the investor who is looking to invest in your software company; both need to understand the financial health of the company.

4. Taxation Information

Weekly reconciliation and monthly financial reports will help you peg down the need, if any, for making the right investments for taxation purposes. Many software businesses operate worldwide and each region has their own tax laws and regulations. To stay on top of each so that the business doesn’t suffer during filing or audits, the owners should be vigilant about taxation reports.

Some key financial statements that every software business owner should always request from their financial controller:

Balance Sheet

The balance sheet is a summary of the financial transactions of a company, i.e. assets, liabilities, and equity of a company. It depicts a picture of the financial strength of the company and their cash flow capacity. Balance sheets can also identify other trends, such as how the receivables cycle works, how net profits are being used, and how often IT infrastructure and software is replaced.

Income Statement

The Income Statement, also known as the Profit & Loss Statement (P&L), reflects the company’s revenue and ongoing expenses during any stated time period. The purpose of an income statement is to show how the company has performed by listing sales and expenses, and the resulting profit or loss.

Cash flow statement

The cash flow statement is a more in-depth document compared to the P&L. It lists the inflow and outflow of cash during any stated period of time. This movement of money can derive from any department or activity within the business. It could be hiring an employee for a project, or renting space and equipment for a new office.

To summarise, a business that has timely financial reporting can proactively make decisions to:
• Reduce costs
• Increase sales
• Purchase assets
• Identify sources of cash and other financial needs
• Allocate human resources appropriately; especially hiring
• Purchase vs rent space/technology infrastructure
• Rework business processes